Wednesday, April 23, 2008

OPEC looks to increase oil production

OPEC (Organisation for Petroleum Exporting Countries) announced plans yesterday to boost oil production by 5 million barrels a day by 2012. OPEC General-Secretary Abdalla Salem el-Badri said its member states will spend $160 billion in four years to increase production capacity from the current level of 32.3 million barrels a day. With oil currently at an all-time high of a $118 a barrel, el-Badri would not speculate if the increased production would bring down the price. "This conference has nothing to do with oil prices,” he said. “This conference is only a platform for producers and consumers to talk about many issues.”

The conference he was referring to is the International Energy Forum which finished up in Rome yesterday. Speaking on the final day, el-Badri said oil prices were decided by the market not by OPEC whose members produce 40 per cent of the world's oil. He blamed the weak US dollar and the actions of speculators for soaring oil prices. The price has risen by $57 in the last 12 months. Last night, the New York price closed at a record-high of $119.37 blamed on “a tumbling dollar, unrest in Nigeria and OPEC's reluctance to increase output”.

According to Turkish analyst Metin Gezin, OPEC is well within its right not to increase supply in the short term. He says OPEC members are trying to maximise the net present value of their reserves. If the market expects the price to rise, then there is an incentive to hold off on production increases until they get the best price. The chief economist of the International Energy Agency believes that oil prices will remain high for the foreseeable future due to rapid increases in demand from the huge developing economies of India and China.

But there may be a larger problem. Russian oil production is waning while its domestic demand is outstripping supply. Similarly Indonesia, Mexico and Iran are all either already at, or close to, being net importers of oil. OPEC itself has admitted that the prospect of Peak Oil may not be very far away. In 2006 Dr Shokri Ghanem of Libya’s National Oil Corporation said it could happen as soon as 2010. “It could take place sometime within the next decade or so,” he said, “Which in fact means that there is not much time left for a world economy to be driven largely by oil.”

What such a future would mean to OPEC members is anyone’s guess. By 2010 it will be a middle-aged organisation celebrating its 50th birthday. OPEC was created at the 1960 Baghdad Conference with the objective of co-ordinating petroleum policies among oil producing nations, keep a stable price and supply, and act as a wedge against the power of the major oil companies. It started with five founding members Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. Eight other countries have since joined. They are Qatar (1961), Indonesia (1962), Libya (1962), United Arab Emirates (1967), Algeria (1969), Nigeria (1971), Ecuador (1973 although its membership was suspended between 1992 and 2007) and Angola (2007). Gabon joined in 1975 but left again in 1994. OPEC’s initial headquarters were in Geneva but since 1965 has been housed in Vienna.

In its initial decade of existence, the big oil companies ignored OPEC. The organisation did not gain worldwide prominence until the 1973 Oil Crisis. By then US oil production was on the wane while its energy demands increased. The October 1973 crisis was engineered by OPEC as a protest against the Yom Kippur war between Israel and its Arab neighbours. OPEC decided they would no longer ship oil to the West in protest at the US and its allies support of Israel. The producers raised the price of oil by 17 percent and cut production by 25 percent. By 1974 the price of oil had quadrupled from $3 to $12 a barrel. While the crisis had eased by then, the West was now acutely aware of the power of the new oil cartel.

However, the influence of OPEC diminished greatly since those heady days in the early 1970s. New oilfields were discovered in the North Sea, Mexico and Russia which undermined its muscle. As a result OPEC changed its stance to ensure market stability through its price range mechanism. But OPEC’s position is changing again as non-OPEC output declines. Some analysts see parallels between today’s problems and what happened in the 1970s. Now like then a mixture of a poor US economy, high inflation, supply problems a long and costly war threatens to return control of the oil industry to OPEC. El-Badri’s $160 billion announcement will look very cheap indeed if that happens.

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